Forwarded this email? for more BOOM: JUDGE BLOCKS KROGER-ALBERTSONS MEGA-MERGER CHALK UP ANOTHER AND PERHAPS FINAL WIN FOR FEDERAL TRADE COMMISSION CHAIR LINA KHAN, AS JUDGE ADRIENNE NELSON PREVENTS THE CONSOLIDATION OF THE GROCERY INDUSTRY. Matt Stoller Dec 11 READ IN APP Late this afternoon, Judge Adrienne Nelson issued a preliminary injunction blocking the $24 billion merger of grocery giants Kroger and Albertsons, leaving Federal Trade Commission Chair Lina Khan with yet another big litigation win. On BIG, we’ve covered this merger several times, because of its size, scale, and legal importance. Nelson had a strong opinion, echoing the FTC’s argument in challenging the merger. The commission’s logic was simple. Kroger and Albertsons, if they combine, will gain market power and use it to raise prices to consumers and lower wages to workers. There’s a lot more than that, of course, but that’s the gist. I’m going to highlight some of what Nelson wrote, which includes important statements on labor and the new merger guidelines, but first I want to give some context on why the merger mattered. Let’s start with the food industry, which is already far too consolidated. My earlier analysis of the case hasn’t changed, so I’ll just quote it here. > “There are already 30% fewer grocery stores than there were a few decades ago,” which impacts pricing, and large chains “not > only secure better prices for goods than their smaller counterparts, but can also increase prices faster than costs, > contributing to inflation.” This merger will worsen the situation, as “suppliers, consumers, and workers will all feel the > pressure from Kroger/Albertsons, and since suppliers buy from farmers, farmers will feel it too, at least indirectly.” The two chains themselves are among the biggest players in the industry. > Kroger and Albertsons are both monsters, and the two of them combining would create the second largest chain in the country, > after Walmart, with 15% of the national grocery business. Kroger/Albertsons would employ over 700,000 people, have over $200 > billion in revenue and more than 40,000 private label brands, and own and operate brands such as Safeway, Ralphs, Smith’s, > Harris Teeter, Dillons, Fred Meyer, Vons, Kings, Haggen, Tom Thumb, Star Market, Jewel-Osco, and Shaw’s. Had this merger gone through, other supermarket chains were going to merge in a frenzy of consolidation. So Khan’s allies, which now include a large chunk of organized labor, are rejoicing. But even Wall Street doesn’t seem particularly concerned - Albertsons stock dropped modestly, and Kroger’s is up - since the sentiment has been that this merger was a loser. The judge in the case bought the arguments from the Federal Trade Commission, and dismissed what the defendants had to say. One key question was whether there even is such a thing as competition in supermarkets, since people can buy food at Dollar Stores, Walmarts, and Amazon, as well as traditional stores. Nelson wasn’t having it. “The fact that a shopper may make a monthly trip to Costco to stock up on a smaller number of bulk purchases,” she wrote, “does not make a "Costco run" a reasonable substitute for a weekly one-stop visit to a supermarket to purchase most or all grocery items for the week.” She even mocked the defendant’s economics expert, Mark Israel, who has now been embarrassed in a host of trials, from Google to the JetBlue Northeast Alliance. Israel argued, and I’m not kidding, that there was no evidence that a grocery store, if it became a regional monopoly, would raise prices. As the judge put it, "surprisingly, this included a finding that ‘even if Kroger were a hypothetical monopolist with a 100 percent share within Dr. Hill's supermarket or large format markets, it would not be expected to increase prices by even once percent.’” I’m actually starting to wonder why Israel continues to be hired for these trials. But the fundamental legal problem for the merging parties was simple, and had to do with the logic of the deal. Kroger and Albertsons argued that they needed to combine so they could create economies of scale to compete with Walmart, and they would have wound up with 5000 or so stores had the deal gone through. At the same time, they had stores that overlapped in terms of region, meaning there were hundreds of places in the country where it was obvious they would become a local monopoly. To cure this issue, Kroger and Albertsons said they would spin out 500 stores to a third party, C&S, which is a big food distributor. That would preserve competition in those particular areas, while allowing the bigger merger to go through. And that gets to the simple problem. How exactly does it make sense to say that a grocery chain needs to be big enough to compete with Walmart, while at the same time creating a smaller third party rival? The answer is that it doesn’t. And that’s a key reason the judge said the deal is illegal. > There is ample evidence that the divestiture is not sufficient in scale to adequately compete with the merged firm and is > structured in a way that will significantly disadvantage C&S as a competitor. C&S' history of unsuccessful grocery store > ventures and its continuing dependence on defendants throughout the TSA period also suggest that the divestiture will not > adequately restore competition. The deficiencies in the divestiture scope and structure create a risk that some or all of the > divested stores will lose sales or close, as has happened in past C&S acquisitions. This merger is one of many wins for Khan, from Capri-Tapestry to IQVIA-DeepIntent, multi-billion dollar challenges. And like those other decisions, it also builds useful case law. Nelson is the first judge to endorse the 2023 Merger Guidelines explicitly, endorsing lower thresholds for market share combinations. While Kroger and Albertsons argued she should rely on the 2010 Obama era guidelines, and ignore the new ones, the judge saw “no reason to reject the 2023 Merger Guidelines in favor of a previous edition.” That’s a big win. She also revived old legal precedent on labor, citing an important decision from 1948. “Although the inclusion of workers in the 2023 Merger Guidelines is new,” she wrote, “the concept of antitrust protections that extend to workers, not just consumers, is not. See Mandeville Island Farms v. Am. Crystal Sugar Co., 334 U.S. 219, 236 (1948).” And most impressively, Nelson argued that Congress’ point in passing the updates to the Clayton Act in 1950 was to “promote competition through the protection of viable, small, locally owned business.” There are other important elements, but that’s enough for now. I will say that this merger isn’t enough to promote competition in the food system. The core problem is the legal regime that allowed the growth of Walmart, which is the legality of charging different prices for the same good to different buyers. What discriminatory pricing does it is makes business all about bargaining power. The bigger you are, the better prices you can extract from suppliers, and that fosters an inherent need for consolidation. And this discriminatory pricing was at work here. As the judge put it, “Because Kroger and Albertsons may pay different prices for the same vendors or products, the merged firm's shared knowledge of those prices will allow it to negotiate a ‘best-of-both’ price toward the lower end of the range of prices.” Discriminatory pricing should be illegal, and actually is, according to the Robinson-Patman Act, but that law hasn’t been enforced for decades. A desire for consolidation is the result. At any rate, it’s a bittersweet victory. It’s likely the merger decision for Khan, who will be leaving her successor with a litigation team set up to win big cases. Just after the judge released her opinion, Donald Trump announced he’ll designate Republican Andrew Ferguson as Chair. Ferguson, a current commissioner who used to work for Mitch McConnell, will try to find a path between the traditional GOP Chamber world and the new J.D. Vance realignment types. To round out the full commission, Trump announced another conservative, a former staffer for Senator Mike Lee, Mark Meador, as the fifth FTC Commissioner. In his new role, Ferguson will probably not take big swings like Khan, but this victory over the Kroger-Albertsons deal cements her legacy as the key organizer of the revival of antitrust law. And state attorneys general, regardless of what happens at a Federal level, are already continuing the work. - Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy. cheers, Matt Stoller This is a free post of BIG by Matt Stoller. If you liked it, please sign up to support this newsletter so I can do in-depth writing that holds power to account. Like Comment Restack © 2024 Matt Stoller 548 Market Street PMB 72296, San Francisco, CA 94104 Get the appStart writing